Devotion Capital Management

04/07/2026

Did none other than Michael Burry (think Big Short Movie) just echo our concerns on SBC (share based compensation)?

A Study of the NASDAQ 100 Index & Its Constituents

03/25/2026

Free cash flow is often viewed as a proxy for owner’s earnings. But when that cash is used to offset stock-based compensation, how “free” is it really? Either shareholders fund buybacks or they accept dilution—the cost is paid either way. Pinterest (ticker: PINS) offers a clear example. My latest: When Free Cash Flow Isn’t So Free https://devotioncapital.com/pinterest/

03/17/2026

Lyft eliminated its dual-class share structure and moved to one-share-one-vote — a rare move for any public company. Add roughly $1B in free cash flow, essentially no net debt, and a ~$5.6B market cap, and it got our attention.
Read more:
https://devotioncapital.com/lyft-a-rare-signal-of-partnership/

Occasionally a company does something that reveals how it truly views its shareholders. Lyft (ticker: LYFT) recently did just that—and the move is both shareholder-friendly and rare. In August 2025, the company eliminated its dual-class share structure after founders Logan Green and John Zimmer co...

03/11/2026

Costco - a great brand is not always a great investment.

https://devotioncapital.com/costco/

With all the geopolitical uncertainty, Costco Wholesale Corporation (ticker: COST) is seen as a safe harbor in a storm. In preview, we recommend caution. Bulls will say that COST shares rose after the company reported quarterly earnings above expectations. Indeed, in its most recent earnings report,...

03/06/2026

https://devotioncapital.com/commentary-to-our-letter-to-subaru/

We are devoted to active ownership of our portfolio holdings. Learn about why we have reached out to Subaru and what makes the shares so attractive.

We recently sent a written communication to Subaru Corporation (Tokyo: 7270.T | ADR: FUJHY). https://devotioncapital.com/subarus-ownership-stake-in-toyota-shareholder-inquiry/ Our Japanese is rusty and the company does not appear to accept email communications from shareholders, so we have resorted....

02/26/2026

When Free Cash Flow Isn’t So Free

AutoNation (ticker: AN) and Lithia & Driveway (ticker: LAD) are two of the largest automotive retailers in the United States. They operate dealership networks that sell new and used vehicles. In addition, they provide service and parts and increasingly originate auto loans through their finance platforms. In short, they are not just car sellers — they are in the retail and finance businesses.

Devotion clients have owned both companies successfully in the past. They are serious operators and important consolidators in a fragmented industry. Scale matters in auto retail, and both companies have executed well.

In recent years, AN and LAD have aggressively returning capital to shareholders. In 2025, AutoNation repurchased roughly 4.1 million shares, reducing its share count by approximately 9–10% and spending about $785 million. Lithia repurchased roughly 3.0 million shares, reducing its share count by about 11% and spending nearly $947 million. Both companies also continued paying dividends. Based on earnings forecasts for both companies, they look cheap - selling at less than 10x forward earnings. So what is the catch?

AutoNation reported approximately $1.05 billion of adjusted free cash flow last year. The operative word is adjusted. Adjusted for what? Adjusted for the increase in auto loans receivable — the cash used to finance customers. When a company expands its loan portfolio, cash leaves the business. That capital is deployed into credit exposure. It is not sitting on the balance sheet as surplus cash. Removing that outflow from free cash flow may be technically defensible as a reporting choice, but economically it is a real use of cash.

Lithia presents similar non-GAAP metrics, while its Driveway Finance platform has grown meaningfully and requires substantial receivables funding. Growth in finance receivables consumed capital. That capital must come from somewhere.

Repurchasing stock is a use of cash. Paying dividends is a use of cash. Extending credit to customers is a use of cash. Capital expenditures are a use of cash. The natural question is simple: where does the cash come from?

In short, if you don’t “adjust” (or ignore) the cash these companies used to finance their customers’ car purchases, free cash flow would be zero (if not negative).

Adjusted free cash flow is a perfectly reasonable number to report. But debt increased for both companies last year.

Neither AN nor LAD is simply selling cars for cash. A meaningful portion of their economics now depends on financing customers. Extending credit supports sales and can be profitable, but it introduces credit and other risks that a simple P/E ratio does not capture.

There is a historical lesson worth remembering. In the late 1990s, companies like Lucent and Nortel supported revenue growth by extending vendor financing to customers. Sales appeared strong and earnings looked solid, but much of that growth was supported by expanding credit to customers. When customers failed to pay, the structure became fragile. AutoNation and Lithia are not telecom equipment vendors, and the comparison is not exact. But the structural lesson is relevant: when companies help finance their own demand.

A single-digit forward P/E can look like a margin of safety, but that isn’t sufficient.

AutoNation and Lithia may continue to execute well. Consolidation may continue to create value. Management may continue to allocate capital effectively. But it is too easy to glance at forward earnings and assume these are simple, cash-rich retailers returning surplus profits to shareholders. They are not pure retailers. They are retailers layered with finance businesses.

When adjusted free cash flow excludes the capital deployed into lending, investors should understand exactly what is being adjusted. When buybacks, dividends, and loan growth all require cash — and leverage fills the gap — free cash flow is not always as free as it appears. Cheap does not always mean low risk.

Time will tell if these companies were right to buy back massive amounts of shares while also paying dividends and financing ever more customers.

In the meantime, we will remain on the sidelines.

Devotion to margin of safety.

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Disclosure: The author and Devotion Capital clients DO NOT currently own shares of AutoNation (AN) and Lithia & Driveway (LAD).

02/25/2026

Are We Rowing Alone?

Whirlpool Corporation (ticker: WHR) is in the headlines today after Appaloosa sent a sharply worded letter to the board criticizing capital allocation decisions and specifically a decision to raise capital by selling additional shares.

https://www.prnewswire.com/news-releases/appaloosa-sends-letter-to-whirlpool-board-of-directors-302697107.html

Appaloosa is a hedge fund led by David Tepper, one of the most successful investors of his generation and owner of the Carolina Panthers.

When someone with Tepper’s track record goes public, frustration has become extreme. The capital raise by WHR and how it was done obviously hit the wrong chord.

Devotion has closely followed this situation. We have owned WHR several times in the past. We came to the same conclusion as Appaloosa - just sooner. We concluded that this management team was not the kind of partner we want.

The acquisition of InSinkErator from Emerson Electric (ticker: EMR) was illustrative for us. Emerson effectively celebrated the valuation it received. When the seller is crowing about price, owners of the buyer should pay attention.

Whirlpool paid $3 billion in cash for the garbage disposal manufacturer Insinkerator in 2022 and borrowed a lot of money to do it. The deal smacked of desperation to us.

To put that figure in into perspective, all the equity of Whirlpool is currently valued at $4 billion. And the company is buckling under the weight of the debt it took on to fund ill-advised acquisitions, poorly timed stock repurchases, and dividends they could not afford.

The Tepper letter is when a manager can’t take it anymore. It gets written when capital allocation mistakes compound and shareholder value evaporates.

Even billionaires can be wrong.

We are not traders of stocks - we seek long term compounding. We want to be partners with management teams on behalf of our clients. And when that partnership breaks down or obviously was never there, we leave.

Devotion to Partnership.

Disclosure: Devotion Capital and its clients hold no position in Whirlpool (WHR).

02/24/2026

PayPal: No Buyout Required — But Welcome at the Right Price

Yesterday Bloomberg reported renewed takeover interest in PayPal Holdings (ticker: PYPL) after the company has lost nearly half its market value over the past year — here’s the article: https://www.bloomberg.com/news/articles/2026-02-23/paypal-attracts-takeover-interest-after-stock-slump.

Devotion owns PayPal.

In hindsight, we bought too early. Investors are clearly worried about growth, but our investment never required growth re-acceleration and it certainly doesn’t require a buyout (though one would be welcome at the right price).

At roughly a $40B market cap and $6B+ in projected free cash flow, the stock trades at a mid-teens free cash flow yield. The balance sheet is stronger than many realize — cash and investments exceed total debt. This isn’t a leveraged turnaround. It’s a scaled payments platform generating billions in annual owner earnings with meaningful financial flexibility.

When a business like that loses nearly half its value, it’s not surprising that interest starts to surface.

Our thesis rests on cash generation.

Devotion to Owner Earnings.

Disclosure: The author and clients of Devotion Capital own shares of PYPL.

02/23/2026

Same Company, Different Arithmetic

In March 2000, Cisco Systems (ticker: CSCO) briefly became the most valuable company in the world with a market cap approaching $600 billion. It had earned roughly $3 billion of reported net income in the prior year. Cisco was profitable, dominant, and central to the build-out of the internet. It wasn’t a fraud. But at that valuation, the company traded at roughly 200x earnings — an earnings yield of just 0.5%.

CSCO had real earnings. CSCO had real growth. But the math didn’t work.

When the bubble burst, valuation collapsed. We purchased shares post-bubble when the earnings yield was approximately 8–10% and the company held substantial net cash on the balance sheet — a period when price, balance sheet strength, and arithmetic were finally aligned.

Fast forward to today and Cisco earns roughly $10–$12 billion annually — three to four times what it earned at the peak — yet the market cap sits closer to $200–$220 billion, a fraction of its 2000 valuation and at a multiple nearer 15–20x earnings. Earnings are dramatically higher; valuation is dramatically lower.

Investors who bought at or near the 2000 peak waited nearly two decades just to revisit prior price levels. Adjusted for inflation, many never fully recovered. That is the consequence of overpaying — even for a great business.

That’s the cautionary lesson as investors pile into tech names today with little to no earnings at extreme valuations: business quality cannot rescue an investment made at the wrong price. Arithmetic always has the final word.

Price determines return.

Devotion to Arithmetic.

Disclosure: Neither the author nor clients of Devotion Capital own shares of Cisco Systems (CSCO).

02/21/2026

We exited Molson Coors Beverage Company (ticker: TAP) last year at prices higher than today’s quote and have not reinvested. The closer one looks the less we like it. The headline cash flow math is interesting, but the company-specific volume trend isn’t cooperating.

Management is guiding to roughly $1.1B in forward free cash flow (±10%) over the next year. With a market value under $10B, TAP shares screen somewhat attractively. Share buybacks are ongoing. Debt is steady, but manageable.

Industry pain across the alcohol space is evident — from Diageo plc to Constellation Brands — raising the possibility of consolidation. But TAP’s own sales volumes have been consistently and materially negative, and pricing can only offset that for so long. Cutting price to chase units becomes a race to the bottom, while raising price on a shrinking base has limits.

Warren Buffett has often pointed to case volume at Coca-Cola as the key metric - a simple signal of brand strength and long-term intrinsic value growth. We think Molson Coors is no different.

It’s also worth knowing that when a business contracts, free cash flow can get a short-term lift from working capital coming out of the system — lower inventories and receivables — which flatters the headline number even as the underlying fundamentals deteriorate. Buying inexpensive cash flow in a declining volume business can become a value trap. Until TAP’s volume trend stabilizes, the enterprise isn’t expanding — it’s shrinking — and that’s the trend that matters.

Devotion to Understanding

Disclosure: Neither the author, nor Devotion clients have any position in TAP shares.

02/20/2026

The market hates Western Union (ticker WU). It’s old tech. Very old. It’s not AI, not crypto, not exciting or sexy. They move money around. Who cares?

Worse: It does not have growing sales, which is the only metric Wall Street really cares about.

But strip away the narrative and look at the math. Western Union announced 4Q earnings today. In the last year, WU generated roughly $400 million in free cash flow against about a $3.1 billion market cap. That’s a ~13% free cash flow yield. That’s a real cash engine.

They paid down some debt and repurchased shares. In fact, shares outstanding are down about 6% y/y and the current dividend yield is 9+ percent.

While the market chases stories, Western Union is quietly generating cash, shrinking the share count, and paying owners to wait. Boring doesn’t trend — but it can be very profitable.

Devotion To Intrinsic Value

Disclosure: Our clients own WU shares.

02/18/2026

This is one of the best examples of value investing we have ever seen. Worth the read… should be entitled “Even the Ketchup in the Refrigerator”

Jay Leno on buying a $13.5 million Rhode Island mansion—and how it compares to Beverly Hills.